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For instance, you can calculate how an option might react to an interest rate increase or a dividend distribution to help better predict the outcomes of your options strategies.
This page is a guide to creating your own option pricing Excel spreadsheet, in line with the Black-Scholes model (extended for dividends by Merton).
Interest rate does not affect the resulting option price very much in the low interest environment, which we’ve had in the recent years, but it can become very important when rates are higher.
For example, if the option expires in 24 calendar days, you will enter 24/365=6.58%.Market influences can result in highly unexpected price behavior during the life of a given options contract.While no model can reliably predict what options premiums will be available in the future, some investors use pricing models to anticipate an option’s premium under certain future circumstances.When pricing a particular option, you will have to enter all the parameters in these cells in the correct format. Volatility is the most difficult parameter to estimate (all the other parameters are more or less given).The parameters and formats are: S = underlying price (USD per share) X = strike price (USD per share) σ = volatility (% p.a.) r = continuously compounded risk-free interest rate (% p.a.) q = continuously compounded dividend yield (% p.a.) t = time to expiration (% of year) Underlying price is the price at which the underlying security is trading on the market at the moment you are doing the option pricing. It is your job to decide how high volatility you expect and what number to enter – neither the Black-Scholes model, nor this page will tell you how high volatility to expect with your particular option.